How do you assess detection risk in auditing?

Detection risk occurs when you don’t use the right audit procedures or you don’t use them correctly. You assess inherent and control risk and then solve your audit risk equation by assigning detection risk to reduce your audit risk to an acceptable level.

What is the relationship between audit risk and detection risk?

‘ Detection risk is defined as ‘the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

What is detection in risk assessment?

Detectability is often defined as the ability to detect a failure before it causes harm. The purpose of considering detection in any scenario is to ensure that potential or actual failures can be identified with enough time to take action before the user is adversely affected.

How can we reduce the risk of detection?

The level of detection risk can be reduced by conducting additional substantive tests, as well as by assigning the most experienced staff to an audit. Examples of the tests that may be conducted are classification testing, completeness testing, occurrence testing, and valuation testing.

What is the role of detection risk?

Detection risk is the chance that an auditor will fail to find material misstatements that exist in an entity’s financial statements. These misstatements may be due to either fraud or error. Auditors make use of audit procedures to detect these misstatements.

What is planned detection risk?

Planned detection risk is the risk that audit evidence will fail to detect misstatements that exceed a tolerable amount. When an auditor reduces the planned detection risk, this will require the collection of more evidence. Conversely, if the auditor increases the planned risk, this will require less evidence.

What is an example of detection risk?

These are the three main components of detection risk. Applying an audit procedure incorrectly. For example, when an auditor applies the wrong acceptable ratio when using ratios to evaluate the face value accuracy of an account balance. Incorrect audit testing method.

What is detection risk in audit?

Detection risk is one of the three elements that comprise audit risk, the other two being inherent risk, and control risk. Detection risk occurs when an auditor fails to identify a material misstatement in a company’s financial statements. There are three types of audit risk: detection risk, inherent risk, and control risk.

How can auditors control audit risk?

Auditors cannot control the inherent risk or control risk. They can however balance these risks by determining a suitable detection risk to keep the overall audit risk in check. Detection risk directly influences audit strategy.

What determines the extent and nature of audit procedures?

The extent and nature of audit procedures is determined by the level of detection risk required to bring audit risk to an acceptable level. Auditors cannot control the inherent risk or control risk. They can however balance these risks by determining a suitable detection risk to keep the overall audit risk in check.

What are the components of Audit Risk?

Components of Audit Risk include Inherent Risk, Control Risk and Detection Risk. Audit Risk is the risk that an auditor expresses an inappropriate opinion on the financial statements. Skip to content